Sapir scores as football lifts Ecofin gloom

By Stewart Fleming

Date: 15/09/05

Those EU officials who left the informal Ecofin Council in Manchester, England, last Saturday afternoon and headed for the Old Trafford football stadium, the 'Theatre of Dreams', may have seen something to cheer about as the two local Premiership football clubs, United and City, battled to a spirited draw. They had certainly not found much to raise their spirits during the previous two days.

Surging oil prices, creeping protectionism, the incalculable economic and political damage wrought by Hurricane Katrina, all cast their shadow over the meetings of finance ministers in a city which was once home to the British free trade movement.

Gordon Brown, the British finance minister and Ecofin ma"tre d' during the UK presidency, disingenuously proclaimed at the final press conference that the finance ministers had "reached consensus on the [economic] reforms" Europe needed. Even if they had, they had certainly not succeeded in figuring out how to overcome political opposition to those reforms at home and so to meeting the challenge of globalisation.

André Sapir, professor of economics at Université Libre de Bruxelles and a senior fellow at the city's new think-tank Bruegel, offered the finance ministers a paper arguing that although the collapse of the single currency, or the exit of some of its members, is not as close as some proclaim, the fact remains that "dysfunctional labour markets and social policies are not only a threat to...the single market but also endanger the currency union".

Taking a pot-shot at the crude political discourse which divides the EU into 'Anglo-Saxon' and 'continental' models he wrote that "the notion of a 'European social model' is misleading. There are in reality different European social models with different features and different performance".

He saw four models, Nordic, Anglo-Saxon, Continental and Mediterranean, which all differed in the way they protected citizens against poverty, unemployment and ill health.

One key difference, he said, was between the Continental model (Germany, France, Belgium, Luxembourg and Austria) that supported workers by providing employment protection (with an emphasis on making it difficult to fire employees) and the Nordic and Anglo-Saxon models which were more permissive in allowing workers to be fired but provided comprehensive unemployment benefits. (The US model, he pointed out, was unique in that it provided little in the way of either employment protection or unemployment insurance.)

Sapir's report maintains that the Continental and Mediterranean models are fiscally unsustainable, particularly with aging populations and low growth. Moreover, "in an era of rapid change...[relying on strict employment protection laws] discourages adaptation to change, preserves the status quo...[and] therefore reduces overall employment and increases unemployment".

As for the efforts by EU governments to tackle reform, Sapir dismissed the Lisbon Agenda as "rapidly failing" and said that the current method of exchanging information and best practice in order to promote reform (the so-called open method of co-ordination) suffered from a major flaw. "It is neither a very convincing benchmarking and peer-review exercise nor is it an effective method for changing the behaviour of national governments."

In 1970, Sapir pointed out, developing countries provided only 10% of developed countries' imports. Today it is more than 45% and, with the emergence of China, rapidly rising. The EU, with an economy "stuck in a system of mass production, large firms, existing technology and long-term employment patterns", needed to speed up reform. The place to start, Sapir argued, was "by completing the single market", including reforming the services (and financial services) market. "Efficient provision of services is crucial for the growth of a modern economy," he said.

• Stewart Fleming is a Brussels-based freelance journalist.

Article reports on the informal Ecofin Council in Manchester, England, 9-10 September 2005. At the meeting, André Sapir, professor of economics at Université Libre de Bruxelles and a senior fellow at the city's new think-tank Bruegel, offered the Finance Ministers a paper arguing that although the collapse of the single currency, or the exit of some of its members, was not as close as some proclaimed, the fact remained that 'dysfunctional labour markets and social policies are not only a threat to...the single market but also endanger the currency union'.